Traders bet Fed will keeping raising interest rates

FILE PHOTO: A police officer keeps watch in front of the U.S. Federal Reserve building in Washington, DC, U.S. on October 12, 2016. REUTERS/Kevin Lamarque/File Photo

(Reuters) - Interest rate futures traders on Friday were still betting the U.S. Federal Reserve will ramp interest rates gradually higher this year and next, after a government report showed U.S. employers last month added fewer jobs than expected but continued to raise wages.

Prices on the contracts tied to the Fed’s policy rate, traded at CME Group’s Chicago Board of Trade, indicated about an 80 percent chance of a fourth 2018 Fed rate hike in December, and a better-than-even chance of two further hikes by September 2019. That was little changed compared to before the report.

“The overall picture is that the labor market remains solid and robust,” said Matt Luzzetti, senior economist at Deutsche Bank in New York. The jobs report also showed the unemployment rate fell to a 49-year low of 3.7 percent.

The upshot: the U.S. central bank is likely to keep raising rates slowly, as it has all year. U.S. Fed Chairman Jerome Powell this week called the economic outlook “remarkably positive.”

But traders still don’t expect the Fed to go quite as far as Fed policymakers themselves do. Forecasts released last week point to three or perhaps even four rate hikes next year.

U.S. job growth slowed sharply in September likely as Hurricane Florence depressed restaurant and retail payrolls, but the unemployment rate fell to near a 49-year low of 3.7 percent, pointing to a further tightening in labor market conditions.